Knowing when to sell out of a stock and when to keep hold of successful investments can be a challenging balance to strike: go too early, and investors risk missing out on a rally, go too late, and they might capture too much of the downside.
However, for Philip Wolstencroft, founder of the Artemis SmartGARP (Growth at a reasonable price) process, a common mistake is sticking around too long because investors get attached to narratives.
“People like to talk in stories when it comes to investing”, Wolstencroft told Portfolio Adviser. “The investment world is full of storytellers.”
This is a mistake because, if an investor becomes keen on a stock’s story, it’s easy to lose sight of the fundamentals, he explained.
This is a key point of differentiation for the Artemis SmartGARP (Growth at a reasonable price) European Equity fund, which can have a comparatively high turnover, generally holding onto stocks for about a year.
This approach seems to have worked well for Wolstencroft. His fund is one of the top five best-performing funds in the IA Europe ex UK sector over standard time frames (one, three, five and 10 years), according to FE fundinfo data.
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“Because our average holding period is about a year, there are plenty of stocks we liked last year or the year before that are not in the portfolio now,” Wolstencroft said.
For example, he referred to Stellantis, a European car manufacturer which was their highest-conviction holding between 2023 and 2024.
Product specialist Harry Eastwood explained the opportunity for Stellantis post-pandemic was that its earnings had accelerated relative to the market but remained cheap.
But as the company entered 2024, the earnings profile rolled over. “That typically is never a good sign,” Eastwood said.
“It went from delivering pretty attractive fundamental growth to looking almost like a value trap,” Eastwood explained.
The team had almost entirely exited the position by May 2024, despite it representing almost seven per cent of the portfolio a year earlier.
By contrast, it is easy to get attached to certain stocks after runs of strong performance, and risk staying invested a stock for too long, he explained.
As an example, he pointed to European pharmaceutical company Novo Nordisk. “Every fund manager in Europe loved it; we never really owned it.”
Wolstencroft argued that the market had become fixated on the story of rising obesity, and believed the business’s position as a major producer of weight loss drugs was a compelling long-term moat.
The Artemis manager said: “What we observed in August 2024 was the first crack in the Novo Nordisk story, when they cut their earnings forecast by about 2% or 3%.
“What happens with these wonder stocks is that people say these downgrades are a temporary phenomenon, that they’re reinvesting in whatever the story is.”
Sticking around in stocks like this because the investor has become attached to the narrative is a common mistake, according to Wolstencroft.
“Our numbers were saying that this is a stock on twice the market multiple, and it’s downgraded.
“You shouldn’t be sticking around to find out whether it’s temporary or not.”
This approach paid off when the share price “collapsed” from its June 2024 highs. Over the past year, the stock price has tumbled by around 31%, according to Google Finance data as of 15 May.
Similarly, an obsession with stories can cause investors to miss out because they fixate on the negatives even when fundamentals are more supportive. For the Artemis manager, European financials were a good example of this.
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European financials have been a strong-performing part of the market over the past decade, with the MSCI Europe Financials index up about 247.1%. By contrast, the wider MSCI Europe was up 158.8%, a gap of nearly 90 percentage points.
After the global financial crisis, when bank earnings fell, fund managers became insistent that banks were low-quality businesses and attributed the recent surge in share prices to a temporary phenomenon, according to the manager.
“Here we are almost four years later, and banks’ share prices have been dragged kicking and screaming upwards, and people are still saying, ‘let’s sell the banks because they’re rubbish, low-quality businesses.”
“They might be, we’re not really sure,” he added. But the fundamentals remain very supportive, with many banks still on track to deliver good growth, even after strong performances in recent years.
“The banks are generally behaving well, the management is doing sensible things, they are not doing crazy acquisitions, and they’re delivering good growth”.
“But they seem to be doing good, rational things, so why not give them the benefit of the doubt?”
As a result, financials have remained a core allocation for the team, with a 40.3% weighting in the fund at the time of writing.
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